Equity Asset Research Articles

Risk conscious investment¶

The risk conscious investor is defined as the maximizer of a conservative valuation or a dynamic nonlinear expectation. Both the static and dynamic problems are addressed using distortions of tail probabilities or distortions of tail measures. The multivariate static problem is solved in the context of the multivariate bilateral gamma model. For the dynamic model states and their transitions are modeled in two ways. The first defines states by a parametric model for the return distribution with transitions described by a continuous-time finite state Markov chain between the distributional possibilities. In the second model states are represented by the first four power variations with transitions given by (OU) equations for modeling stochastically the first four power variations as Tempered Fractional Lévy Processes (TFLP). Numerical solutions for policy functions are implemented in trading 768 equity assets over seven years ending December 2021.

Devil in FIPA: the motivations and consequences of frequent inter-industry portfolio adjustments in the Chinese mutual fund market

ABSTRACT Based on the equity asset allocation of Chinese open-end active funds, we examined the potential motivations and economic consequences of frequent inter-industry portfolio adjustments (FIPA) by funds. The research findings indicate that the fund tournament effect compels managers to engage in FIPA. Funds with higher managerial ownership exhibit lower levels of FIPA, suggesting that managers themselves do not favour FIPA. Instead, evidence suggests that fund managers cater to investors’ preferences for FIPA, but there exists an asymmetric effect between top-performing and underperforming funds. Specifically, top-performing funds attract more capital inflows after engaging in FIPA, while underperforming funds tend to engage in more aggressive FIPA, leading to net outflows of funds. Furthermore, the results exclude the motive of funds engaging in FIPA for risk hedging purposes. Finally, we explored the impact of FIPA on the stock market, revealing that fund FIPA delays the incorporation of negative company-specific information into stock prices, ultimately reducing stock price information efficiency.

Product network and origin of common equity factor risks

This paper extends the multisector asset pricing model based on production networks, achieving direct pricing of a firm’s equity assets at a more microscopic level within the product network. An Equilibrium-Aligned PageRank (EA-PR) centrality algorithm is proposed, and it is theoretically proven that EA-PR centrality can reflect the relative value of products and further derive the value of firms. A new equity asset pricing factor is constructed based on the EA-PR centrality of firms. The key findings can be summarized as follows: Firstly, the EA-PR centrality of firms shows a significant positive linear predictability for equity returns, and the returns associated with the EA-PR centrality factor cannot be fully explained by the Fama–French 6 (FF6) factors. Secondly, the EA-PR centrality factor demonstrates significant explanatory power for the FF6 factors and, to some extent, exhibits predictive ability for future returns of the FF6 factors. Thirdly, the product network model can effectively reflect the market competitiveness and growth potential of firms, and firms with high EA-PR centrality have stronger value capture capabilities, improving gross profit margin, cash flow, and investment growth in the future. Finally, this study empirically demonstrates the consistency between the product network model and the pricing theory of the q5 model, which incorporates the expected growth factor.

Analisis Faktor Pertumbuhan Kredit Bank Komersil Di Indonesia

This research analyzes the influence of Non-Performing Loans, Loan to Deposit Ratio, Loan Loss Provision, Equity Asset Ratio, Liquidity Ratio, Gross Domestic Product, Inflation, Interest Rate, Bank Capital, and Bank Size on Loan Growth Rate in banking companies listed on the Indonesia Stock Exchange (BEI) from 2019 to 2023. The method used is regression multiple panels with secondary data obtained through purposive sampling, covering 205 financial reports from 41 companies. The results of the analysis using Eviews 12 show that Non-Performing Loans, Loan to Deposit Ratio, Loan Loss Provision, Equity Asset Ratio, Liquidity Ratio, Gross Domestic Product, Inflation, Interest Rate, Bank Capital, and Bank Size have a significant influence on Loan Growth Rate. This research provides important insights into the factors influencing loan growth in the Indonesian banking sector, as well as implications for risk management and banking policy.

Distributed Energy Resources as an Equity Asset: Lessons Learned from Deployments in Disadvantaged Communities

Distributed Energy Resources as an Equity Asset: Lessons Learned from Deployments in Disadvantaged Communities

Hedging the climate change risks of China's brown assets: Green assets or precious metals?

A large discrepancy exists between the dire impact of climate change projected by most natural scientists and the modest estimates of damages calculated by mainstream economists. In this article, we first measure the climate risk, including the transition and physical risks, in China using textual analysis. Then, considering the heterogeneity of climate change's effect, we investigate the impact of climate risks on the brown and green assets of China (including price, volatility, and correlation) for the period from February 2012 to April 2022. In addition, the performance of China's green assets and international precious metal assets is examined in hedging the climate risk exposure of China's brown assets. The results reveal that transition and physical risks lead to contrary changes in the prices of brown and hedging assets. Transition risk causes the volatility of brown and green assets to change in the opposite direction, while physical risk causes the volatility of the two types of assets to change in the same direction. Under extreme climate risk conditions, the correlation between brown and hedging assets decreases. Finally, the findings show that the performance of international precious metals in hedging climate risk exposure is better than that of China's green equity assets.

The Influence Of Liquidity, Leverage , Profitability, And Inflation On Stock Prices

This research aims to examine the influence of liquidity, Leverage, profitability, and inflation on the stock prices of trading companies listed on the Indonesia Stock Exchange during the period of 2017-2021. A quantitative approach was utilized in this study. The sample was selected using purposive sampling method, consisting of trading companies listed on the Indonesia Stock Exchange during the years 2017-2021. Initially, there were 79 companies, but the sample was narrowed down to 8 trading companies where their financial reports were publicly available and accessible. The findings of this study are as follows: (1) Current Ratio (CR) does not have a significant impact on stock prices, with a significant value of 0.365 > 0.05. (2) Debt to Equity Ratio (DER) does not have a significant impact on stock prices, with a significant value of 0.320 < 0.05. (3) Return on Equity Assets (ROA) has a significant positive influence on stock prices, with a significance value of 0.00 < 0.05. Based on the simultaneous testing results, this research confirms a significant influence between the variables of Current Ratio (CR), Debt to Equity Ratio (DER), and Return on Assets (ROA) on Stock Prices, with a significant value of 0.000 < 0 . Keywords: Liquidity, Leverage, Profitability, Inflation, Stock Prices.

The accounting for defined benefit pension plans in family firms

AbstractThis paper investigates the accounting for defined benefit pension plans in U.S. family firms. Relying on agency theory and the literature on defined benefit pension plans, we test whether the allocation of pension plan assets, the expected rate of return on pension plan assets and the contributions to defined benefit pension plans in family firms are significantly different from those in non‐family firms. Relying on a sample of U.S. firms over the period 2004–2018, we first document that family firms take more risk when allocating their pension plan assets relative to non‐family firms where they allocate a larger (smaller) percentage of pension plan assets in equity (debt) securities. We also show that family firms are more aggressive in setting the expected rate of return on pension plan assets than non‐family firms. However, family firms’ contributions to defined benefit pension plans are comparable to those of non‐family firms. Our findings hold after controlling for the endogeneity in family firms. These findings are important since they provide first hand empirical evidence on the accounting for defined benefit pension plans in family firms. They further shed light over pension plans that serve as a key tool to attract and retain executive talents and make up a significant portion of firms balance’ sheets.

Home bias and the returns of strategic portfolios: Neither always so good nor so bad

Home Bias is a phenomenon that has been sufficiently addressed from many different perspectives, such as active management or structural investment constraints. However, there is little work about the economic effects of these situations. This work aims to quantify the impact of this effect on the returns of a set of strategic portfolios with the same allocation between fixed income and equity assets. The statistical information includes the daily values of all indices for the 2004–2021 period. Returns have been calculated for investment time horizons of between 5 and 15 years. Quantile regressions have been used to assess changes in returns in response to changes in portfolio composition. The results suggest that over-investment in local assets is not always positive and dependent on the local index selected.

Insights into the dynamics of market efficiency spillover of financial assets in different equity markets

This paper provides multidisciplinary insights into the dynamics of market efficiency spillover of financial assets, considering Bitcoin, DXY (U.S. Dollar Index), S&P 500, and crude oil in different equity markets. Given this, we employ the multifractal detrended fluctuation analysis (MF-DFA) and the time-varying parameter vector autoregressive models (TVP-VAR) to illuminate these complex interplays between these assets and other equity markets. Our findings display that Bitcoin acts as a net transmitter, whereas DXY functions as a net receiver. Additionally, Bitcoin, DXY, and S&P 500 clearly exhibit dynamics in information transmission, whereas crude oil does not. It means that the low connectedness of the oil market in terms of market efficiency spillover, suggesting that the oil market may play an effective role as a hedging instrument for other assets.

Examining the Dependence Structure Between Carry Trade and Equity Market Returns in BRICS Economies

This paper contributes to the literature on carry trade by investigating the dynamic correlation and the dependence structure between the US-dollar carry trade and equity markets in the (Brazil, Russia, India, China and South Africa (BRICS)) economies during sample observations that include regular and crisis periods. Furthermore, the nonlinear Granger causality test based on the feed-forward neural networks (FFNN) model assesses how global volatility predicts the dynamic correlation between the US-dollar carry trade and equity markets in BRICS. The paper finds the dynamic correlations between carry trade and equity markets in BRICS are more pronounced during most global crises. Moreover, the results of the symmetrised Joe Clayton (SJC) copula model showed that the lower tail dependence between the two series is higher during the various crises. Furthermore, the results of the empirical analysis show that global volatility predicts the dynamic correlations between carry trade and equity markets in BRICS only during crises. Asset managers and investors can benefit from this paper's findings regarding portfolio diversification, risk management, asset allocation, and hedging when dealing with equity assets and carry trades.

The impact of the effective tax rate change on financial assets of commercial banks: The case of Visegrad group countries

While many tax professionals have discussed corporate taxation in the banking sector and its effectiveness on bank institutions, investment decisions, bank size, asset structure, or bank rentability, there is little evidence of tax efficiency within V-4 Group. The research on banks and tax rates is mainly based on American data. Few papers solved banking stability and corporate taxes within the European countries. This paper examines effective corporate taxation in the banking sector of the V-4 Group and aims to find out how the effective tax rate change affects commercial banks’ financial assets. In this study, we examine the relationship between variables using regression analysis in which we assess the impact of ETR on bank financial assets. We examined data in the consolidated financial statements data of commercial banks and tested their impact on the economy. Our findings supported the theory that ETR impacts the banking sector, particularly capital and equity financing. However, the results did not prove the research hypothesis, in which we assumed that an increase in ETR would lead to an increase in financial assets. Based on our results, it leads to an increase in equity assets (7.34%) and a decline in debt assets (16.83%).

External asset network and international transmission of economic policy uncertainty

With the gradual deepening of economic globalization, the international external asset holdings has reached an astonishing scale, and its role in the international transmission of Economic Policy Uncertainty should be given sufficient attention. By using the Rolling-Lasso method to construct a cross-border transmission network of Economic Policy Uncertainty, this article explores how the transmission is affected by the external asset and its structure. The results show that: (1) There is a significant positive correlation between the scale of external asset and the cross-border transmission of Economic Policy Uncertainty. (2) The impact of external asset shows structural characteristics, i.e., the effect of Portfolio Investment and Direct Investment is relatively more significant than that of bond assets in equity assets. (3) For those countries with lower level of financial openness or pegging and anchoring exchange rate regimes, they are more likely to transmit Economic Policy Uncertainty to the destinations of external investment.

Size matters: Unpacking the relationship between institutional investor size and private equity asset allocation within diverse institutional contexts

This study examines the relationship between institutional investors’ size and their inclination towards private equity investments, hypothesizing a U-shaped pattern. It also explores how this relationship is influenced by the institutional context. Using a dataset of 5668 firms across 52 countries from 1991 to 2017, we observe that small and large institutional investors exhibit a stronger preference for private equity compared to intermediate-sized counterparts. Smaller investors show heightened interest in private equity within favorable contexts, while larger investors pursue such opportunities in unfavorable contexts. Our research offers valuable insights for policymakers and investors of diffferent sizes making private equity investments in diverse institutional contexts.

Challenges and economic consequences of IFRS 9: evidence from China

PurposeThis study investigates the implementation challenges and economic consequences of the International Financial Reporting Standards 9 (IFRS 9) Financial Instruments.Design/methodology/approachDescriptive evidence on equity asset reclassifications and estimated impairment using the new expected credit loss (ECL) model are presented. Multivariate analyses on the disposal of available-for-sale (AFS) and fund investment post-announcement and the value relevance of impairments to financial assets post-implementation are performed.FindingsOver 60% of sample firms report inconsistent equity asset reclassifications and do not change estimated impairment using the new expected credit loss model. Firms also switch from AFS to equity fund investments post-announcement. Lastly, impairments to financial assets increase in value relevance to investors’ post-implementation, but only in financial institutions and firms with Big 4 auditors.Originality/valueThis study's findings suggest that IFRS 9 presents implementation challenges and changes equity investment strategies. They also indicate cross-sectional differences in firms' ability to effectively apply the new standards. This study is valuable for policymakers, business leaders, investors and academics.

Constructing Sentiment Signal-Based Asset Allocation Method with Causality Information

AbstractThis study demonstrates whether financial text is useful for the tactical asset allocation method using stocks. This can be achieved using natural language processing to create polarity indexes in financial news. We perform clustering of the created polarity indexes using the change point detection algorithm. In addition, we construct a stock portfolio and rebalanced it at each change point using an optimization algorithm. Consequently, the proposed asset allocation method outperforms the comparative approach. This result suggests that the polarity index is useful for constructing the equity asset allocation method.

Sustainability and Inflation: A Bi-front Malaise

The singular presence together of inflation and deflation is only apparently improper because we must always distinguish on the subject of inflation, about which phenomenon we are talking. In general, we can say that the two phenomena - called classics - cannot share. With an important distinction. If inflation or deflation is - as already said "classical" - that is, it affects the economic system due to errors made by governments in managing the economy. In this case, inflation has its own characteristics: that is, it is subject to constant acceleration and its race continues until monetary policy intervenes with the rise in the interest rate. Different the case of inflation from international prices, due to the increase in the cost of energy and rare earths, as well as cereals, etc. Well in this case, the subjection of daily prices is linked to the evolution to which they are subject due to speculation and to the selfishness of producers. In the case of international price inflation, the decision of central banks to raise the cost of borrowing has a marginal effect on cost inflation. However, it has a strong indirect effect because the rising cost of credit puts lead into the pockets of speculators. With the result of containing the speculative thrust to the advantage of domestic prices which are slowing down. We are in a period of creeping deflation and tensions on the stock markets and capital assets front, two phenomena that have direct repercussions on daily spending and aggravate the difference between the rich and classes close to poverty. It is therefore essential to mitigate the social tensions that accumulate that the issue of international price controls, starting with wheat and energy, are addressed at the G7 and G20 level for a policy of moderation on these prices. On the topic of the recurring pressure of stock market values and of equity assets, in search of the reasons for the unjustified rise, we point out the hypothesis that this for the moment moody rise in values has the possibility that it could be a sort of hypothetical foretelling of human society when we have achieved full neutrality with nature. At the time, a sharp acceleration in development could change our economics of scarcity.

Bankruptcy Risk and the Cross-Section of REITs

This article investigates the equity cross-section of real estate investment trusts (REITs) both when REITs are added as a separate portfolio to the cross-section of industries and when individual REITs are studied in isolation. A nine-factor asset pricing model which critically relies on the bankruptcy risk factor of Neumann (2021b) produces REIT portfolios which outperform the REIT market in terms of Sharpe ratio and the S&P 500 index in terms of absolute returns. The decrease in adjusted R² of an asset pricing model when REITs are included as a separate portfolio is presented as an alternative quantification of the temporally dynamic correlation between REITs and other equity assets.

Mathematical Modeling of Concentration Risk under the Default Risk Charge Using Probability and Statistics Theory

In the Fundamental Review of the Trading Book (FRTB), the latest regulation for minimum capital market risk requirements, one of the major changes, is replacing the Incremental Risk Charge (IRC) with the Default Risk Charge (DRC). The DRC measures only the default and does not consider the migration rating risk. The second new change in this approach was that the DRC now includes equity assets, contrary to the IRC. This paper studies DRC modeling under the Internal Model Approach (IMA) and the regulator conditions that every DRC component must respect. The FRTB presents the DRC measurement as Value at Risk (VaR) over a one-year horizon, with the quantile equal to 99.9%. We use multifactor adjustment to measure the DRC and compare it with the Monte Carlo Model to understand how the approach fits. We then define concentration in the DRC and propose two methods to quantify the concentration risk: the Ad Hoc and Add-On methods. Finally, we study the behavior of the DRC with respect to the concentration risk.

Empirical Analysis of the Effects of Macroeconomic Variables on the Equity Market Risk Premium in South Africa

The relationship between the Equity Market Risk Premium (MRP) and macroeconomic variables has been a subject of extensive debate in the finance literature. The MRP is a central component of the main asset pricing models which are used to estimate the cost of equity which is mainly used in investment appraisal, performance measurement and valuation of equity assets. Prior studies have identified a number of macroeconomic variables such as inflation rate, interest rate, foreign exchange rate and political risk as the key macroeconomic variables that determine the size of the MRP. Grounded on previous literatures, the test of the impact of these macroeconomic variables on the MRP is mainly based on data obtained from the developed countries and a few emerging countries, leaving a huge knowledge gap in African based literature. This necessitated the investigation of inflation rate, interest rate, foreign exchange rate and political risk on MRP within the South African context, as these fundamental variables vary across countries. Using secondary time series data for the period 2002 to 2017, a total of 192 observations per variable was used in the study. The model used were tested for possible misspecification errors that could arise from using a secondary time series data and the regression model was fitted using the Ordinary Least Square (OLS) estimator. The results show that inflation rate, interest rate and foreign exchange rate have a negative impact on the MRP whilst political risk has a positive impact on the MRP. Furthermore, the result shows that the inflation rate is the only variable amongst other variable tested that has a significant influence on the MRP for the study period. The study recommends that inflation rate should be monitored and kept within the inflation target to increase investors’ confidence in the security market and also foster economic growth. Keywords: All Share Index, Equity Market Risk Premium, Macroeconomic Variables, Risk-Free Security, South Africa. DOI: 10.7176/RJFA/13-16-03 Publication date: August 31 st 2022